Cap-and-trade vs. carbon tax: a bird in hand is worth two on Alpha Centauri

Tax! Cap! Tax! Cap! Pant … I find it really hard to believe, but the perennial “carbon tax vs. cap-and-trade” debate is still going on. It goes on and on and on and it never changes. It’s like everyone’s following a script now.

I’ve been over this territory so many times that I hardly know what to say any more. So here’s what some other people are saying:

Michael O’Hare responded with a heated defense of carbon taxes (or as he calls them, carbon charges), premised mainly on a basic misunderstanding of Romm’s post. (Joe wasn’t defending cap-and-trade as such against the carbon tax alternative — he was defending Waxman-Markey, including all its complementary policies, against the tax alternative.)

Ryan Avent says taxes and caps are not that different in effect and only one has a chance of passing, so carbon taxers should STFU. Andrew Sullivan responds that he thinks the tax will work better, and so no, he won’t STFU. Kevin and Ryan both respond to Sullivan, pointing out that he seems to be suffering from some serious misunderstandings about cap-and-trade systems. (In this he has, to put it mildly, plenty of company).

Is that it? I think that’s it. For now, anyway. I’m sure the entire roundelay will repeat itself soon enough.

Rather than tread all this ground yet again, here are what I take to be the three key points:

• The policies are, or can be made, roughly equivalent. With a tax you get certainty about prices but uncertainty about emission reductions; with a cap you get the inverse. You can tweak a tax to shift the balance; you can do the same to cap-and-trade. Both can be weakened with loopholes and favors for special interests. Political reality being what it is, either is likely to impose a fairly low price on carbon for the first decade or so. Which means …

• In the short-term, complementary policies will spur the most action. The never-ending, chin-stroking carbon pricing debate perpetually overlooks this basic fact. (See: “Cap and Trade is Not Enough: Improving US Climate Policy” [PDF] from Carnegie Mellon.) What’s going to knock us off the status quo path in the next decade is, above all, new targets and standards for energy efficiency. Also: a renewable energy standard, a low-carbon fuel standard, smart-grid standards and funding, government procurement policies, direct government investment, etc. etc. These are the policies that could get things rolling immediately. And guess what?

• The Waxman-Markey bill contains those complementary policies. Also, it exists. Both these characteristics set it apart from the Alternative Universe Carbon Tax Pony Bill. Carbon taxers seem blinded by a misguided obsession with the specific mechanics of carbon pricing. By bashing Waxman-Markey, they are aligning themselves with people who want to block the best opportunity for climate/energy action in a generation. They’re aligning themselves with people who want to block it not in favor of a pony alternative, but in favor of doing nothing, to protect corporate donors. In many cases, they are adopting the exact same rhetoric as conservative obstructionists.

If taxers want to engage productively, they should advocate for tax-like features in the cap-and-trade provision of the Waxman-Markey bill — price floors and/or ceilings, fully auctioned permits, expanded banking and borrowing, etc. Bashing the whole bill in order to argue endlessly and fruitlessly in favor of a hopeless alternative, the advantages of which exist entirely in the whiteboard fantasies of economists, is politically daft.

The focus should be twofold: a) get complementary policies up and running quickly, and b) get some kind of carbon pricing scheme in place, which in future years — as the depredations of climate change become clearer to the public — can be tweaked and improved. Passing the Waxman-Markey bill would achieve both.

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